Bank of Japan Sets A 2% Inflation Target

The Bank of Japan has announced its decision to set a two percent inflation goal, and also vowed to simplify monetary conditions “decisively” in the end of a two-day policy meeting.

“The bank sets the ‘price stability target’ at two percent in terms of the year-on-year rate of change in the consumer price index,” the Bank of Japan said in a statement. “The Bank will pursue aggressive monetary easing … through a virtually zero interest rate policy and purchases of financial assets,” it added.

“With respect to the Asset Purchase Program, the Bank will introduce a method of purchasing a certain amount of financial assets every month without setting any termination date,” it said.

In January next year, after the current Y10 trillion round of assets purchased has expired, the bank will start buying Y13tn ($146 billion) of primarily short term government debt every month unless the inflation target is achieved. The Bank of Japan also said that it would take steps to strengthen the co-operation between the bank and the government to reduce deflation and achieve “sustainable economic growth”

An open–ended easing step was also initiated by Bank of Japan, similar to that of U.S. Federal Reserve. It includes buying government bonds and other comparatively low risk financial assets from financial institutions without setting any deadline.

Critics are not very confident of the bank’s existing easing efforts. These efforts could not stir much demand for credit. The current deposits, Y40 trillion, at the Bank of Japan are more than five times the amount the reserve banks are required to keep. The bank could not do well over and again in supplying cheap loans to banks under the asset-purchasing program

“Financial institutions already have huge amounts of excess reserves which they have no way to utilize,” said Izuru Kato, chief market economist at Totan Research in Tokyo.

The officials at Bank of Japan have raised their concerns that if the higher levels of inflation is targeted, it could increase the asset prices or collapse in the currency. Kaushik Basu, chief economist at World Bank, said last week that the Japan’s attempt to create a 2 percent inflation is a “risky move”.

Bank of Japan has, however, been under political pressure to increase the pace and scale of its easing. Since the Liberal Democratic party came back to power, and Prime Minister Shinzo Abe has focused on removing Japan’s continuous state of mild deflation.